Current trading and outlook
FY17 a mixed year, but solid overall progress
FY17 turned out to be a year of more mixed fortunes for Cohort’s divisions than we had expected. While MASS was lower as expected, MCL profits progressed much as anticipated, and EID made a higher initial 10-month operating contribution, with a much higher margin than had been expected. However, SCS saw business levels contract dramatically, with revenues almost halving from the previous year accompanied by a sharp reduction in order intake. In the period up to its reorganisation it delivered a loss of £0.5m, which was more than offset by savings following the transfers into MASS and SEA of its ongoing activities. SEA also traded slightly below expectations as dismounted soldier research project renewals and follow-ons continued to be deferred.
Divisional key points were as follows:
MASS: excluding the SCS contribution in the second half, MASS experienced a downturn in sales of 7% and operating profits of 10%. A decline had been anticipated but profits were also affected by a one-off cost of £0.3m and continuing investment in the cyber activities. The closing order book of £41.2m (FY16: £41.7m) was broadly unchanged, excluding an SCS contribution of £8.2m. Order intake was much stronger at £32.0m compared to £20.3m.
SEA: on a like-for-like basis, excluding SCS, SEA saw revenues drop to £42.9m (FY16: £48.8m) due to a drop of £6m in R&D contract work for the dismounted soldier programme for the MOD, as well as a tougher trading environment for subsea engineering where revenues dropped to £2m (FY16: £3m). These were partially offset by improved sales to the transport segment and of torpedo launcher systems to overseas customers. The profit performance was also affected by project losses on a one-off towed-array sonar development contract inherited with J+S, which are not expected to recur as the project concludes in the current year. The closing order book of £44.0m included £1.5m from the former SCS businesses and was down from £55.6m in the previous year, largely reflecting the reduction in research contract awards.
MCL: delivered strong profit growth of 50% to £2.1m on revenues that were 8% higher at £14.8m. The closing order book of £15.5m compared to just £7.0m at FY16 close, and points to further strong progress this year, although the strong margin performance may ease.
EID: the initial strong profit contribution of £4.2m was generated on revenues of £16.0m, a margin of 26.4%. The exceptionally high net margin was due to high levels of support work and export activity, which is expected to normalise in FY18.The closing order book stood at £27.6m following order intake of £18.9m in the 10 months it traded as part of Cohort.
SCS: experienced a sharp and persistent reduction in activity in the first half that led management to integrate its ongoing activities between MASS and SEA from November. For the full year, order backlog declined from £11.7m to £9.7m, with intake of just £4.0m. Sales fell to £9.1m from £18.1m in FY16, £5m of which was pre the integration, generating a loss of £0.5m before integration and a profit of £0.8m subsequently. Cost savings of £2.6m should be realised, although an onerous lease accounts for £1m of those and will take time to expire.
Overall the ongoing business saw operating profits decline by 13% on revenues that were 14% lower due to the reductions at SEA and SCS. This was offset by EID’s contribution.
The closing order book for FY17 of £136.5m (FY16: £116.0m) included a first contribution from EID of £28.9m. Over £70m of it is due to trade in the current financial year, ahead of the £65m at the same point a year ago. The improvements are despite the sharp reduction at SCS and the contraction of research orders at SEA. MCL has continued to win significant new hearing protection contracts since the start of the current financial year.
Exhibit 1: Cohort estimates revisions
Year to April (£m) |
2017 |
2018e |
|
Prior |
Actual |
% change |
Prior |
New |
% change |
MASS |
30.7 |
32.5 |
5.8% |
34.1 |
37.1 |
8.8% |
SCS |
17.5 |
5.0 |
-71.4% |
17.5 |
0.0 |
-100.0% |
SEA |
47.5 |
44.4 |
-6.5% |
52.0 |
49.4 |
-5.0% |
MCL |
17.0 |
14.8 |
-13.2% |
18.0 |
18.5 |
2.5% |
EID |
13.1 |
16.0 |
22.5% |
17.3 |
18.9 |
9.5% |
Total group revenues |
125.8 |
112.7 |
-10.4% |
138.9 |
123.8 |
-10.8% |
|
|
|
|
|
|
|
EBITDA |
15.5 |
15.7 |
1.5% |
17.8 |
16.7 |
-6.5% |
|
|
|
|
|
|
|
MASS |
6.1 |
5.9 |
-3.3% |
6.3 |
6.7 |
5.9% |
SCS |
0.2 |
-0.5 |
-326.1% |
1.2 |
0.0 |
-100.0% |
SEA |
5.4 |
5.3 |
-1.8% |
5.9 |
5.9 |
0.0% |
MCL |
2.2 |
2.1 |
-6.7% |
2.3 |
2.3 |
-1.4% |
EID |
2.9 |
4.2 |
47.1% |
3.5 |
3.2 |
-6.9% |
HQ Other and intersegment |
-2.5 |
-2.5 |
0.8% |
-2.7 |
-2.7 |
0.7% |
EBIT (pre-PPA amortisation) |
14.3 |
14.5 |
1.6% |
16.5 |
15.4 |
-7.0% |
|
|
|
|
|
|
|
Underlying PTP |
14.3 |
14.5 |
1.4% |
16.6 |
15.4 |
-7.1% |
|
|
|
|
|
|
|
EPS - underlying continuing (p) |
24.1 |
26.6 |
10.5% |
33.4 |
29.1 |
-12.9% |
DPS (p) |
7.0 |
7.1 |
1.4% |
8.0 |
8.2 |
2.5% |
Net cash/(debt) |
7.0 |
8.5 |
21.0% |
15.7 |
11.5 |
-26.6% |
Source: Company reports, Edison Investment Research estimates
Current year expected to show good progress
FY18 will benefit from a full year contribution from EID, albeit margins will revert to more normal levels. In addition, MCL should see healthy revenue and profit gains and the full year benefit of the corrective actions following the SCS restructuring should also boost profitability.
Our FY18 sales forecast is significantly reduced by 11% due to the lower base level of SCS when combined into SEA, although the MASS expectation is broadly maintained. We have increased our revenue expectations for both EID and MCL modestly. Overall our earnings forecasts have been revised downwards by 7%, largely reflecting the reduced contribution from SCS as well as lower margins at EID than we had previously forecast.
We also expect to see steady progression thereafter in line with the improving outlook for defence markets, with the balance sheet expected to benefit from improving cash inflows, which should facilitate the pursuit of further investments.
